Copycat funds : information disclosure regulation and the returns to active management in the mutual fund industry PDF
Preview Copycat funds : information disclosure regulation and the returns to active management in the mutual fund industry
Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/copycatfundsinfoOOmyer '31 Dewey [415 ; DM Massachusetts Institute of Technology Department of Economics Worl<ing Paper Series Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry Mary Margaret Myers James M. Poterba Douglas A. Shackelford John B. Shoven Working Paper C2-04 October 2001 Room E52-251 50 Memorial Drive MA Cambridge, 021 42 This paper can be downloaded without charge from the Social Science Research Network Paper Collection at http://papers.ssm.com/paper.taf7abstract id=293617 f Massachusetts Institute of Technology Department of Economics Working Paper Series Copycat Funds: Information Disclosure Regulation and the Returns to Active Management In the Mutual Fund Industry Mary Margaret Myers James M. Poterba Douglas A. Shackelford John B. Shoven Working Paper 02-04 October 2001 Room E52-251 50 Mennorial Drive MA Cambridge, 021 42 This paper can be downloaded without charge from the Social Science Research Network Paper Collection at http://papers.ssm.com/paper.tafPabstract id=xxxxx MASSACHUSEHS INSTITUTE OFTECHWOLOGY MAR 7 2002 LIBRARIES Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry Mary Margaret Myers Graduate School ofBusiness, University ofChicago 1101 East 58th Street, Chicago IL 60637 JamesM. Poterba Department ofEconomics, MIT MA 50 Memorial Drive, Cambridge 02142-1347 Douglas A. Shackelford Kenan-Flagler Business School, University ofNorth Carolina CampusBox 3490, McCoU Building, Chapel Hill, NC 27599-3490 John B. Shoven Department ofEconomics, Stanford University Encina Hall, Stanford CA 94305 Revised October2001 Contact Author: MA JamesPoterba, DepartmentofEconomics E52-350, MIT, 50 Memorial Drive, Cambridge 02142- 1347;tel (617) 253 6673; fax (617) 258 7804; email [email protected] ABSTRACT Mutual ftinds mustdisclose theirportfolio holdings to investors semiannually. The costs andbenefits of such disclosures are a long-standing subject ofdebate. For actively managed funds, one cost ofdisclosure is apotential reduction in the private benefits firom research on assetvalues. Disclosureprovides public access to information onthe assets that the fund managerviews as undervalued. This papertries to quantify this potential cost ofdisclosure by testing whether "copycat" mutual fijnds, fiands that purchase the same assets as actively-managed fiinds as soon as those asset holdings are disclosed, can earn retums that are similarto those ofthe actively-managed fiands. Copycat fiands do not incur the research expenses associated with the actively-managed funds that they are mimicking, but they miss the opportunity to investin assetsthatmanagers identify as positive return opportunities between disclosure dates. Oior results for a limited sample ofhigh expense fiands in the 1990s suggest that while retums before expenses are significantly higher forthe underlying actively managed funds relative to the copycat funds, after expenses copycat funds cam statistically indistinguishable, andpossibly higher, retums than the underlying actively managed fiands. These findings contribute to the policy debate on the optimal level and frequency offimd disclosure. We are grateful to Dan Bergstresser, Joel Dickson, Jennifer Wilson, seminarparticipants at the University ofIllinois-Chicago and Indiana University, and especially Mark Wolfson for helpfiil discussions. We also thank JenniferBlouin, V.J. Bustos, Rachel Ferguson, Michael Myers, Angel Townsend, and Candice & Whitehurst forexcellentresearch assistance, the Ernst Young Foundation, theNational Science Foundation (Poterba) and the University ofChicago (Myers) forresearch support, and John Rekenthaler and Annette Larson at Momingstarforproviding mutual fund data.
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